Japan's dual crisis
For decades, Japan has maintained artificially low interest rates, but since 2022, bond yields have begun to rise, and the increase has become steeper. Japan's debt exceeds 270% of GDP, which is a serious problem. Not only is the debt high, but the working-age population is also declining sharply. With rising inflation, the economy in recession, market confidence in long-term Japanese debt is weakening, and there is a reluctance to continue holding it.
Japan's Inflation and Bond Market
Japan has long faced deflation, and both monetary and fiscal stimuli have had limited effects. Recently, inflation has finally emerged, but it is far beyond expectations, while the economy unexpectedly contracted. When inflation is close to zero, the market accepts low bond yields. However, as inflation rises, investors demand higher returns; otherwise, the real value of bonds will be eroded by inflation. In addition, the Bank of Japan is reversing quantitative easing. In the 2000s, the Japanese government purchased 52% of government bonds by "printing money," but it is now difficult to sell this debt back to the market. The market is concerned about inflation.